Variable Rate Car Loans

One of the biggest benefits of owning a car is the flexibility it adds to your everyday life. Want to pop down to the shops? Just a drive away. Need to move something from A to B? Put it in the car. Late for an urgent appointment? You COULD look at public transport schedules and lace up your walking shoes… or you could just jump behind the wheel instead.

If flexibility is important to you, then a car loan with a variable interest rate may also prove appealing. Depending on your lender and financial situation, a variable rate car loan may allow you to save some money on your monthly repayments, or even to pay off your car loan early and hit the road in your very own car that much sooner.

The basics of car loan interest rates

When you borrow money to buy a new or used car, you’ll have to pay your lender a certain amount of interest in addition to the value of the car.

Many lenders offer car loans with fixed interest rates, where the amount of interest that’s charged with your repayments remains the same from month to month. This keeps your repayments consistent for the full term of your loan, helping to ensure that your budget remains simple.

However, some lenders offer car loans with variable interest rates, where your monthly repayments may rise or fall when the lender raises or lowers its interest rates to suit the prevailing economic conditions.

Whether you’re looking at variable or fixed interest rates for your car loan, you’ll also have to pay any fees the lender charges. A low-interest car loan with high fees and charges could ultimately cost you more in total than a higher-interest car loan with lower fees and charges.

To make comparing the total cost of different car loans a bit simpler, take a look at their Comparison Rates. These figures combine each loan’s advertised interest rate with its standard fees and charges, giving you a more accurate guideline for seeing how different car loans stack up alongside one another.

It’s usually worth taking a closer look at the available car loan options – some lenders may offer additional features that could add extra value and influence your decision. Just remember that some car loans have nonstandard fees, charges and other costs that aren’t included in their comparison rates.

Variable Rate Car Loan Benefits

One of the biggest potential benefits of choosing a variable rate car loan is that you may find yourself paying less interest than you expected. While you may start paying off your car loan at the advertised rate, if your lender cuts its interest rates, your monthly repayments will drop accordingly.

The other major benefit of variable rate car loans is that they often offer greater flexibility around your repayments than similar fixed rate car loans, which are more likely to lock you into a pre-set repayment plan, with penalty fees for making extra repayments or for exiting the loan early.

With a variable rate car loan, if interest rates are cut, you may choose to put the money you save on repayments to good use somewhere else, though one possible option is to add these extra savings onto your car loan and get ahead of your repayment schedule. This can help to bring you closer to fully paying off your car loan ahead of schedule, reducing your total number of repayments, and reducing the total interest you’ll pay over your loan’s lifetime.

Variable Rate Car Loan drawbacks

Because there’s no such thing as a crystal ball that makes foolproof economic forecasts, when you take out a variable rate car loan, you run the risk that interest rates may rise during its term. The longer the term of your car loan, the greater the likelihood of eventually experiencing a rate rise. An extended period of rising rates could leave you paying significantly more for your car loan than what you initially budgeted for, putting you at greater risk of financial stress.

Also, it’s worth checking the terms and conditions of your variable rate car loan before you start thinking about exiting the loan early. While many variable rate car loans offer more flexible repayment terms than their fixed rate counterparts, some lenders charge fees for making an early exit from their loans. Make sure that paying off your car loan early won’t accidentally cost you more than you expected.

Redraw Facility

When you’re comparing your variable rate car loan options, a Redraw Facility is one feature that’s often worth keeping your eye out for. A redraw facility allows you to withdraw any extra money you pay onto your car loan in excess of the repayment schedule, subject to your lender’s terms and conditions. This can help you to confidently make extra repayments and get ahead on your car loan, since if an emergency comes up and your finances get a bit tight, you’ll have the option to unlock your extra car loan repayments and put them back into your pocket again.

Secured and Unsecured Car Loans

One way to help keep your car loan’s variable interest rates on the low side is to opt for a Secured Car Loan. By using the value of the car you’re buying as collateral to guarantee your loan, you can lessen your lender’s financial risk – if you default on your car loan repayments, the lender will be able to repossess and sell your car to make their money back. This added security for the lender means they’re more likely to offer you lower interest rates.

However, to qualify for a secured car loan with certain lenders, you may need to be buying a car of a particular make and model, or one that’s under a certain age, to better guarantee its value. And of course, there’s the risk that if you don’t make your repayments, you could end up losing the car.

If this doesn’t appeal to you, there is the option of an Unsecured Car Loan, which doesn’t require the same kind of security, and thus has fewer restrictions around what vehicles it can be used to buy. However, these loans tend to have higher average interest rates to better make up for the increased financial risk to their lenders.

100% car loans

While many variable rate car loans offer increased flexibility compared to some fixed rate car loans, you’re likely to still need to pay a deposit if you want to enjoy the lowest possible interest rates, as a deposit helps to financially secure your loan and reduce the lender’s risk.

But even if you don’t have enough money saved up to afford a full deposit on the car you want, you may still be able to take out a car loan to buy it. Some lenders offer car loans with a higher Loan to Value Ratio (LVR), where you make a smaller up-front deposit and borrow a greater percentage of the car’s value. Other lenders offer 100% loans, where you borrow the full value of the car and pay no deposit.

These car loan options are more likely to charge higher interest rates to make up for the increased lender risk, so consider whether it would be more affordable to make these higher monthly repayments, or to save up for that initial deposit.

Checking your car’s financial history

If you’re buying a car that’s been owned before, it’s usually worth checking out whether it still has money owing on it from a previous owner, a.k.a a financial encumbrance. To check this, you can organise a Personal Property Securities Register (PPSR) report, previously known as a REVS check. It’s possible to organise one of these reports for yourself, however your lender may be able to save you some time and effort by organising one for you, though some lenders charge a fee for this service.

Compare Variable Rate Car Loans

Do you know what you’re looking for in a car loan? If flexibility is important to you, variable rate car loans could sound appealing. At RateCity, you can compare different car loan offers from Australian lenders, and work out which one will best suit your finances, based on its features and benefits.

Once you’re confident in your choice of variable rate car loan, all you need to do is contact the lender to get the ball rolling. Soon you’ll be able to drive away in a car of your own, and enjoy the extra flexibility it adds to your lifestyle.

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